February 16, 2008

Prediction: $1 Trillion U.S. Carbon Market By 2020

The U.S. will be home to a $1 trillion carbon emission market by 2020 if federal and state policymakers continue on their current path towards a cap-and-trade program that is confined to domestic trading only, according to an analysis of bills before the U.S. Congress by New Carbon Finance research economists.The researchers predict that in 12 years a carbon-constrained U.S. economy that includes a cap-and-trade system allowing only domestic trades will produce:

• A $1 trillion carbon trading market - more than twice the size of the European Union’s Emissions Trading Scheme;
• A carbon price of $40 per tonne as soon as 2015, which will result in a rise in consumer energy prices in real terms of roughly 20 percent for electricity, 12 percent for gasoline and 10 percent for natural gas - as well as impacts on other prices as higher energy and transportation costs filter through the economy; and
• Major U.S. investments in renewable energy, energy efficiency, and greenhouse gas mitigation projects and technologies.

New Carbon Finance predicts a U.S. carbon price of $35-40 per tonne as soon as 2015 if the Lieberman-Warner bill, with its blanket veto on international project credits, succeeds into law…

“We believe that, to smooth the transition to a carbon-constrained economy, any climate change bill should provide for international project credits, currently available at $10 to $20 per tonne,” Says Milo Sjardin, who heads the North American division of New Carbon Finance. “This component can then be reduced over time to achieve greater emissions reductions within the U.S.”

Allowing carbon-constrained U.S. firms to trade credits with firms in China or India, for example, where emission reduction measures are relatively inexpensive, would yield an estimated U.S. carbon price as low as $15 per tonne, thereby saving the American economy about $145 billion per year, says Guy Turner, London-based Director of New Carbon Finance.

The impact on U.S. consumer level energy prices of a carbon price of $15 vs. $40 a tonne is estimated by New Carbon Finance as follows:

At $15 a tonne:

• Electricity would increase seven percent in real terms from today’s average U.S. retail price (marginally higher than increases seen over the past four years);
• Gasoline would increase four percent (approximately 13 cents a gallon in today’s terms, small relative to increases caused by higher oil prices); and
• The impact on the price of natural gas would be five percent.

At $40 a tonne:

• Electricity would increase 20 percent in real terms from today’s average U.S. retail price;
• Gasoline would increase 12 percent (35 cents a gallon); and
• The price of natural gas would increase about 10 percent.

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